Gold Finds Support on Greek Austerity Deal

Posted on: February 13, 2012

Gold prices are mixed Monday, trading near $1,720 an ounce after Greece’s parliament approved an austerity bill needed to release a second round of bailout funds. The news pushed gold and silver higher as the euro strengthened against the U.S. dollar, but gains were tempered as investors used the rally to lock in profits.

While Sunday’s vote to approve austerity measures paves the way for Greece to receive its next 130 billion euro bailout and avoid a default, challenges for the country remain. Greece must now come to a deal with private bondholders on their bond swap and interest payments on those new bonds. According to The Street, this offer needs to be extended by Friday in order to give creditors time to the review the plan.

In addition, Greece must convince an increasingly skeptical Eurozone that it will stick to the terms of the rescue package. Eurozone finance ministers meet on Wednesday, and Greece has until then to say how 325 million of a total 3.3 billion euros in budget savings will be achieved. “Now we need to wait and see what comes after the legislation,” said Economy Minister and deputy Prime Minister Philipp Roesler, according to Rueters. “We have taken one step in the right direction but we are still far from the goal,” he said.

The gold market has been largely driven this year by uncertainty in the Eurozone and the risks posed to the global economy by a potential sovereign default.  While gold prices may be pressured by profit taking in the short-term, analysts have stuck by their projections for higher prices by year-end.

James Moore, analyst at FastMarkets.com says gold “remains underpinned by good volumes of physical interest with the metal likely to be bolstered by ongoing diversification.” Oliver Pursche, co-portfolio manager of the GMG Defensive Beta Fund, says that while the reduced risk of a default in Greece has subdued safe haven demand, negative real interest rates, inflation pressures and central bank buying will support higher prices. Pursche’s price target for gold is still unchanged at $2,000 an ounce. “If you are a short term trader the short term trend is down,” he told The Street. “If you are long term, you hold if you are in it or add to it a little bit.”